As sports leagues resume play, Hogan Lovells’ Sports, Media & Entertainment group identifies seven key trends to watch in the sports sector

Key trends to watch in the sports sector

1. Re-opening with caution

The onset of COVID-19 this year brought an abrupt halt to major sports events in the United States and globally, leading to billions of dollars of losses. Now that sports play has resumed, the industry is facing a new reality.

In the U.S., the major leagues—including Major League Baseball, the National Football League, the National Hockey League, Major League Soccer and the National Basketball League—are still looking for ways to bring their fans back into the stands. In the UK, the government recently put on hold a plan to allow some sporting venues to admit spectators with strict safety standards.

“Welcoming fans back raises a host of issues, including the need to conduct health screening, and the privacy concerns associated with the collection of health data,” said Hogan Lovells Partner Craig Umbaugh, Global Head of Hogan Lovells’ Sports, Media and Entertainment Group.

“Sports teams, event organizers and venue operators aren't used to handling health data, which is regulated differently from the consumer data that these organizations typically collect—such as fan experience and merchandise data,” Umbaugh said. “As businesses decide which measures will be implemented for fan health and safety, anticipating privacy concerns will help build trust and create an experience where fans feel safe.”

Another issue associated with reopening is potential liability if people contract COVID-19 following attendance at games. There are discussions in the United States about seeking federal legislation that would include liability protection for promoters, teams, and venues that host live events in accordance with applicable health and safety guidelines.

2. Investors look to Europe

Even before the pandemic, investment in European sports franchises was an increasingly attractive alternative to U.S. teams. This continues to be true.

“International team audiences are growing, revenues are increasing, and teams are likely to become more profitable,” said partner Matthew Eisler, who is Global Co-Head of the firm’s Sports group. “The moment seems ripe for interested investors to look into cross-border team ownership opportunities.”

Advantages to investment in Europe include the opportunity for greater growth, since the market for sponsorship and naming rights in many foreign countries isn’t as mature as it is in the U.S. Different ownership rules in Europe enable investors in teams to have greater involvement in the decision making. Further, the ability to sell player contracts in Europe provides investors with diversified access to cash flow.

“Another key investment driver in Europe is the growth of the popular profile of football across the continent—beyond its traditional powerbase in the UK and Spain—which has led to more lucrative television and streaming rights,” noted Global Co-Head of the firm's Sports group Raj Panasar.

Investment in Europe may also be affected by efforts to cap salaries. “This summer the English Football League approved salary caps, which previously only existed in the UK’s English Premiership, French Top 14 and Pro 14 (all Rugby Union)” said partner Daniel Norris. “However, the European Union has rejected salary cap proposals in football as an unlawful restriction on competition, so it remains to be seen how widespread salary limits will become.”

3. Private equity looks to sports

Private equity firms are sitting on historic levels of investable “dry powder” that needs to be deployed for them to raise new funds. Despite the challenges that COVID-19 poses for event-based industries, the sports sector is viewed as one of the hottest asset classes available right now.

“The sports and live-entertainment industries were booming before COVID-19, and private equity still sees sports and entertainment assets as high cash-flow businesses that, while mature, will still experience extraordinary growth,” said partner Mark Kurtenbach.

While founders of private equity funds, in their individual capacity, own numerous U.S. professional sports teams, the funds themselves largely have been prevented in the past from owning teams because leagues required individual controlling ownership and limited debt leverage. But these restrictions are loosening. MLB and the NBA have opened the door to allowing private capital groups to acquire minority ownership in professional teams, and Major League Soccer is considering a rules change that could allow investment funds to take minority stakes in clubs.

Despite the recent stop in play, professional sports have seen an explosion of private funds focused on acquiring minority stakes in U.S. professional teams and even controlling interest in European teams.

“These funds include some of the most savvy and experienced sports executives around,” noted partner Michael Kuh. “They can quickly and efficiently do their diligence and execute on deals, even when complicated structures and issues are involved. This can be extremely attractive to leagues, teams, and sellers.”

Outside of team ownership, private equity investors are acquiring ancillary sports and entertainment businesses, bringing with them the PE mindset—an emphasis on profitability and growth.

4. Growth of individual outdoor sports

With many gyms still closed or operating at reduced capacities, and fitness classes on pause, sports enthusiasts have rediscovered the appeal of outdoor activities that can be enjoyed while maintaining social distancing, such as running, cycling, golf, hiking, and fishing.

“Amid significant economic retraction, outdoor brands are seeing positive economic impacts,” Kurtenbach said. “The uptick in individual outdoor sports presents significant opportunities for private equity and strategic buyers, and we expect this trend to drive M&A activity.”

We’re still early in this cycle. The growth in individual outdoor sports has only taken off in the last few months as the effects of Covid-19 have spread. We expect this growth to fuel increased M&A activity resulting in further consolidation across outdoor sports.

5. Rise of niche sports

Another trend picking up steam is the migration of sports from traditional pay television to digital platforms. This can create new opportunities for non-marquee sports.

“Sports fanatics have been abandoning expensive cable sports packages in favor of mobile and subscription services offering popular, underexposed sports,” said Kuh. “COVID-19 didn’t start the move away from pay television, but surely accelerated it.”

The shift to mobile devices and internet streaming (OTT) service presents a prime opportunity for emerging sports to develop audiences and attract sponsors. These include women’s soccer, rugby, professional lacrosse, and action sports such as climbing, board sports and BMX and mountain biking. Many of these niche sports have devoted fan bases that will pay for programming.

6. Growing use of technology

While American sports have made innovative uses of technology for some time, the use of technology in sports is expanding globally.

“In the UK, the results of incorporating technological advances have been mixed,” Norris said. “In tennis, the plan to replace line judges at Wimbledon with hawkeye technology appears to be well received. Cricket has honed its use of technology to a degree that almost any player or spectator would consider materially beneficial. However efforts in other sports, notably EPL football, have been less successful in their infancy.”

The expansion of 5G wireless technology, over-the-top media platforms, and augmented and virtual reality will affect sports media rights, marketing, and fan interaction. New technology will change the stadium experience, encouraging stadium modernization, and will be a key part to any growth in sports betting in the United States. The challenges of producing live events during a pandemic has led to new opportunities for cloud-based and autonomous production technologies for sports media. 

“Whether we are talking about apps, data analytics, wearables, or new hardware, we can expect to see tech deployed to enhance fan engagement and improve athlete training. Teams, leagues, sponsors, and others will be on the lookout for joint ventures, investment opportunities, and ways to integrate new tech,” said Kuh.

7. Re-thinking funding for stadium improvements

Even before the pandemic, municipalities were less likely to spend public dollars on new stadium development, and sports team owners and public officials were looking for new partnerships to generate revenue for stadium upgrades. With the financial pressures brought on by COVID-19, this trend is likely to accelerate.

“In the face of growing resistance from cities and states, more teams are getting creative in identifying revenue streams for future stadium development that also benefits the city,” said Umbaugh.

These plans include funding stadium development and maintenance through real estate projects surrounding stadiums.  

Hogan Lovells’ Sports, Media & Entertainment group

Our Sports, Media & Entertainment group advises major league sports teams, world-class media and entertainment companies, media streaming companies, media content developers, and investors. The group’s industry-focused experience extends to licensing and protection of content for video and television broadcasting, music, and web-driven streaming; commercial operations such as sponsorships, naming rights, and brand protection; corporate transactions; management of stadium and arena projects; and free speech issues. We offer clients geographic reach that few firms possess.